Russian Oil Price Ceiling Hit by Iran-Israel Conflict

Oil market participants continue to closely monitor the development of the conflict in the Middle East. However, no one believes in a positive outcome yet, judging by the rise in the price of "black gold" to $78 per barrel on June 19. US President Donald Trump said that he is considering the possibility of holding talks with Iran. This could adjust the price of oil, but so far the situation has not progressed beyond statements. Stanislav Arnett, a junior research fellow at the Center for Strategic Studies of the Faculty of Economics of the Peoples' Friendship Institute of Russia (RUDN University), told MK how geopolitics influences the ongoing fluctuations in the cost of raw materials and whether this is beneficial for Russia.

— What is happening in the oil market now?

— The global oil market is experiencing increased volatility due to the escalation of the conflict between Israel and Iran. Immediately after the first strikes, oil prices jumped sharply – Brent crude futures soared by 13%, to $78 per barrel. This was the largest jump in the last three years. Today, we are seeing fluctuations in the price of a barrel around the $75 mark.

— How does the conflict in the Middle East affect quotes now?

— In fact, the military actions themselves have had little effect on oil exports. Despite the fact that Israel attacked Iranian energy infrastructure facilities and some incidents were recorded in the Hormuz region — tanker collisions, jamming of navigation signals — there have been no interruptions in oil supplies through the strait.

Iran produces about 3.3 million barrels of oil per day, but if necessary, other OPEC+ countries have spare capacity of up to 5.7 million barrels per day, which is enough to compensate for even a complete loss of Iranian exports. However, about $5-10 in the cost of a barrel is currently included in the military risk.

— What will happen to prices next?

— The further trajectory of oil prices largely depends on the development of the Middle East conflict. If the escalation gets out of control and covers the entire region, theoretically, the price of oil could reach three digits. According to Deutsche Bank, if the war spreads to neighboring countries and the Strait of Hormuz is blocked, quotes could reach $120 per barrel. Some experts allow for growth to $150. However, such a scenario seems unlikely: neither Iran nor global players are interested in completely stopping the movement of tankers through the Strait of Hormuz, since this would harm all parties, including Iran.

A limited conflict seems more realistic. If the confrontation remains local, without the intervention of other states, then prices will probably stabilize around current levels. At the same time, high uncertainty remains. However, a new price surge will require more serious events than those observed at the moment.

— Just recently, states unfriendly to us were actively discussing lowering the “ceiling” of prices for Russian oil. What about it now?

— Yes, before the Middle East crisis, the idea of ​​tightening price restrictions on Russian oil from the current $60 to $45 per barrel was discussed in the European Union. Several countries spoke out against such a sharp reduction: in particular, the United States did not approve of a step that could destabilize the market, and within the EU, Greece and Hungary expressed skepticism.

Against the backdrop of the conflict between Israel and Iran, the prospect of lowering the price ceiling to $45 has effectively disappeared. Firstly, due to the war in the Middle East, world oil prices themselves have gone up, making the issue of further tightening sanctions very sensitive for the West. Secondly, the attention and priorities of countries have changed - in the conditions of new geopolitical instability, it is not in their interests to provoke an even greater increase in prices by restricting Russian exports.

It appears that until the Iranian-Israeli conflict is resolved and world oil prices stabilize, plans to tighten the price ceiling for Russian oil will not be implemented.

— Will the EU’s sanctions policy towards Russian oil change?

— No fundamental changes in the EU sanctions policy towards Moscow are expected due to the events in the Middle East — at least in the official rhetoric. The EU remains committed to the goal of reducing Russia's income. However, in the short term, the emphasis has shifted to ensuring market stability. For the West, it is now important that Russian barrels continue to flow to the world market and compensate for possible lost volumes from Iran, which will help curb global price growth.

There is also no reason to expect a softening of the existing sanctions: the abolition or weakening of the price ceiling would look politically unacceptable while the conflict in Ukraine continues. Rather, we can talk about an unofficial moratorium on strengthening oil sanctions. At the same time, we should expect a tightening of measures against the "shadow fleet" to ensure compliance with the existing restrictions.

— Will the Russian treasury benefit from expensive “black gold”?

— The growth of global oil prices plays into the hands of domestic exporters and the budget. The rise in the price of the benchmark Brent grade automatically increased the price of Russian Urals oil. Back in April-May, Urals was trading below the established ceiling of $52-55 per barrel on average. On June 18, the price had already risen to $71. It is also worth noting the reduction in the discount on Urals relative to Brent oil: about $4-5 today versus $10+ at the beginning of the year.

At the same time, the influence of the price ceiling has not completely disappeared. Formally, European traders and insurers still cannot work with Russian oil at prices higher than $60, so Russia relies on alternative buyers - these are mainly Asian countries.

The current situation is rather moderately positive for the Russian budget: compared to spring, oil revenues have grown, the risk of new sanctions tightening in the short term has decreased, but it is too early to talk about an “oil boom”. Additional revenues help to replenish the budget and ease the pressure on the ruble, but not enough to fully compensate for the effect of restrictions. Long-term benefits will depend on how sustainable the new price growth is and whether the EU will introduce new unilateral restrictive measures in the event of de-escalation of the conflict in the Middle East.